Gold (XAU/USD) retreats slightly from the vicinity of the $4,150 supply zone, or a nearly three-week high touched during the Asian session on Tuesday, as a positive development towards reopening the US government undermines safe-haven demand. The safe-haven commodity, however, might continue to draw support from worries about the potential economic fallout from the longest-ever US government shutdown. This, along with expectations for another rate cut by the US Federal Reserve (Fed) in December, could act as a tailwind for the non-yielding yellow metal.
Meanwhile, dovish Fed expectations fail to assist the US Dollar (USD) in attracting any meaningful buyers, which might further contribute to limiting the downside for the Gold price. Traders might also refrain from placing aggressive directional bets amid relatively thin trading conditions on the back of a US bank holiday. This, in turn, makes it prudent to wait for strong follow-through selling before confirming that the recent move higher witnessed over the past week or so has run out of steam and positioning for any meaningful depreciating move for the XAU/USD pair.
Daily Digest Market Movers: Gold bulls turn cautious as hopes for an end to US shutdown undermine safe-haven demand
- The Senate late on Sunday reached a compromise and moved forward on a measure aimed at ending the longest US government shutdown in American history that began on October 1. Investors keenly await the expected flood of delayed data to shed more light on growth amid fears about an economic fallout from the US government closure.
- In fact, the University of Michigan’s Survey showed on Friday US Consumer Sentiment Index slumped to 50.3 in November, or the lowest level since June 2022, from the previous month’s final reading of 53.6. Moreover, investors seem tilted towards a more dovish US Federal Reserve, which continues to lend support to the non-yielding Gold.
- According to the CME Group’s FedWatch Tool, markets now see an over 60% chance of another rate cut by the Fed in December. This, in turn, fails to assist the US Dollar in attracting any meaningful buyers and favors the XAU/USD bulls. However, the risk-on environment warrants some caution before positioning for a further appreciating move.
- US banks will be closed on Tuesday in observance of Veterans Day, leaving the USD and the commodity at the mercy of Fed rate cut expectations. Hence, speeches from influential FOMC members on Wednesday will be looked for more cues about the Fed’s future rate-cut path, which should provide a fresh impetus to the non-yielding yellow metal.
Gold bulls have the upper hand as breakout above 50% retracement level remains in play
From a technical perspective, the XAU/USD pair now seems to have found acceptance above the 50% retracement level of the recent sharp corrective decline from the all-time peak, touched in October. This, along with positive oscillators on the daily chart, validates the near-term positive outlook for the Gold price. Some follow-through beyond the $4,155-4,160 area will reaffirm the bullish bias and allow the bullion to aim towards reclaiming the $4,200 round figure. The said handle nears the 61.8% Fibonacci retracement level, which, if cleared decisively, would set the stage for additional gains.
On the flip side, the Asian session low, around the $4,115 region, closely followed by the $4,100 round figure and the $4,075 region (38.2% Fibo. retracement level), now seems to protect the immediate downside. Failure to defend the said support levels might prompt some technical selling and drag the Gold price to the $4,025 region en route to the $4,000 psychological mark. A convincing break below the latter might shift the near-term bias in favor of bearish traders and make the XAU/USD pair vulnerable to accelerate the fall towards the $3,936-3,935 region before eventually dropping to the $3,900 round figure.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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